Open Forum - Your Tax and Legal Questions

Welcome, everybody, to this week's episode of the Main Street Business podcast with yours truly, Mark Kohler, the Amazing co host, Matt Sorenson. And if you're catching us on YouTube, I think we're coming everybody to this Style points. This week, we're both wearing our sweaters, black sweaters. Apparently it's under 90 in Phoenix, so it's sweater weather. What's sweater weather in Phoenix?

That's true. It's, you know, below 72.

Oh, we're. Wow. Like pulling, you know, your freestyle points.

Yes, we're in our sweaters.

Black sweaters.

Yeah, we're looking pretty dapper today in the sweaters. For any of you out there wearing your sweater today, you're at the right spot.

We tried to clean up for you. We shaved, put on our black sweaters. Like, you know, it's kind of a billions. Look, you're freezing.

Yeah. This is a show about. This is not about sweaters and fashion out there. Clearly, if you're watching on YouTube, you know what we're talking about.

You're at the ride Clean up Black

sweaters share some tax and legal information with you today. And this is the time where we answer sweater weather here. So, yeah, pretty dapper today in the sweater. This is the people show for any of you out there.

I was going to say we can talk about sweater today. We're just killing time a little bit here. Put on our black sweaters. We want you to know this is everybody's welcome. Yeah, we don't try to be too intellectual, too technical. We'll throw down if you guys want with a question here. But really it's about helping you in your small business. You're investing, saving taxes, protecting your wealth. And it's open forum time. So the floor is yours, folks. And if you want to submit questions in the future, head over to mainstreetbusiness.com main street business.com submit a question. Just click on the button and we've got questions as recent as yesterday. So we're just going to start diving into those and hopefully wow you. It's. You're in planning time. Big time. Lots of.

Yeah, yeah. This is where tax planning happens. It's not April 15th. If you're doing tax planning April 15th, you. You're too late.

All right, so it's kind of going up to a Bon Jovi concert and trying to get tickets at the window the night. You know, it's just, it's late. You're too late. It's not gonna happen.

Yeah, yeah. You're living On a prayer there.

Oh, do you see that set up, Corey? Yeah, that's. It's because we. We speak. We're like, we're. We tolep.

Just laid that up for me.

Yeah, just a little lay up there. Okay, Matt, you want to take the first question today?

Yeah, yeah. Let me take this one's from Pablo in Colorado. He's basically asking about the. All the tax changes and legislation that's being debated. He wants to know if Mark's going to update his tax and legal playbook. So I did want to give a quick update on the bill. We're going to do a longer version of that on the directed IRA podcast on the retirement prisons. But I want to give a quick update for everyone on the bill that passed the House last week. This is pretty remarkable. We've been talking about on this show for months, as you guys know, but there are some things we think everybody needs to know that pass the House. Now, remember, it still has to go to the Senate. It's only past the House.

I was gonna say you're being pretty ambitious talking about this when the last time it passed the House and went to Senate, it got the crap kicked out of it. But I think the House knows better. Apparently they talk once in a while, the House and the Senate. So yeah, maybe their people have got with their people and they got together and went to lunch and said, you know what, let's not waste our time. And yeah, but Matt, tell us what the highlights are and we'll probably see this by the end of the year. And I guess whatever we do see passing if it's big enough, it would require a new edition of my book with some updates. I don't think it's going to be that groundbreaking, but.

Right. Yeah, here's. Here's a couple things. First, let me hit small. It hit me in categories if, you know, let's talk about small business in general because there's been a lot in real estate. There's a lot of stuff that had been talked about that's not in 1031. Exchange restrictions. Those are out. 1031s are same as. Same as usual. Okay. Business is usual on 1031s. The 199A deduction, business as usual. That. That was the small business deduction from tax cuts and Jobs act or sorry, from the Trump tax cuts, whatever you want to call them.

Yeah. Tax collection Jobs Act. Okay.

Yeah, that was the right one. Okay. And that though that's still around 199A and the individual rates not adjusted except for Those making like 10 million or more a year. So there's these millionaire surcharge taxes now that are there. So for most small business owners, you're not hitting that. If you are, you know, you're gonna have. You're having pretty high income. So. So there is new rates, but they're calling them a surcharge tax, essentially. But this is. If you're making millions a year, you're not going to run into that. So I think for small business, like real small business, it's business as usual. Yeah. In fact, the one perk is the state and local income tax deduction that was restricted to a $10,000 a year deduction. For the. When you pay your state taxes, you get a deduction from the federal government. They cap that at 10 grand. Well, now that cap has been moved up to 70. So actually some people are going to see a tax reduction as you're able to deduct more of your state and local taxes that you're paying.

Okay. Now before the show completely derails and someone drives off the road and boredom. Is there anything exciting you can tell us that we need to know quickly here?

There's no good news here. The good news is that a lot of the bad news didn't make it.

That's the. Okay, all right. That's.

We're not moving the needle like in the positive direction. We're just not going backwards as much as we thought we would. Okay. Now there's retirement plan stuff in there. The backdoor Roth is going to be closed out. Yeah, Backdoor Roth and the Mega BackDoor 401K at any income level.

Okay, well. And we're going to see what Senate does to it. But many of you have been wondering, what about the self directed LLC IRA strategies? They have been completely removed, those provisions. So self directing on with crypto and real estate and partnering your retirement accounts with others and getting creative, your business as usual. Don't worry about that. But for those that are high income earners that want to kind of build these Roth IRAs, there's going to be some decisions you have to make in the next few weeks if you're going to try to convert. This may be your last window for the foreseeable future, potentially your whole life.

So yeah, now Roth conversions have a little different story. We'll hit that on the directed RA podcast. Just, you know, you got to get over there. I will hit the retirement, but that's the backdoor Rothschild closeout. Roth conversions have some restrictions coming up too.

And what I'D tell everybody. In summary, if it sounds like garbly goop, until we get the final bill signed by President Biden, we don't know what it's going to exactly look like, but all indications are it's going to be minor, minor changes for the average Main street business owner, which is you, our followers, and I don't think there's anything significant you should be worrying about. We will keep you posted. When the final bill comes out, we will hold a special podcast or webinar on the topic. All right, let's move to another topic. Well, this is Scott with employees in Tennessee. He said, I finally received my employee retention tax credit from the IRS for 2020. Do I need to file an amended 2020 return? Can I use an administrative adjustment request? Scott, this is going to be very dependent on your personal tax return and what your income and expenses look like, the type of return you're filing. So, Scott, I wish I could answer that, but if I misspoke, it could be it could create some significant damage for you if I was wrong in any way, shape or form. So I would recommend you get with your personal CPA right away and talk about it and make sure that you do it as soon as possible. Because sometimes waiting to amend because you think, well, I have three years to amend my return. You don't want to wait. Just because you can wait doesn't mean you should. So anybody out there that's got some unique tax credits during the COVID time period, get with your accountant right away. And this is a good time to catch your accountants, too, that you might want to amend or fix a problem or get a consult. We're busy, but not as busy as we are during tax season. So reach out to your people and talk to them next.

All right, how about we hit Lee Richter, Midland, Texas.

Yes. You know, I went to dinner with Lee finally. Yeah, yeah, Lee Richter, been a wonderful follower of ours on the podcast for years, Midland, Texas. He sent so many clients our way and a regular contributor to the show. We can always expect a good, a good question from him. So go ahead, Matt. This is all yours.

Yeah, I think this is a good one about minutes for your company, whether you have a board of advisors in your LLC or board of directors in your corporation. His question is basically, what do I put in the minutes? And he's asking whether I've got a board and we're having a meeting with my board or it's just me in the wee hours of the morning by myself. What do I actually put in the minutes and who signs those. So here's what you should put in the minutes. And this is a standard flow. You can add and subtract whatever you want, but generally you're going to put. There's been no changes in ownership to the company. Let's think of like your annual minutes. Okay. Once a year you're going to at least do this. Okay. No changes in the company. The company office address for, you know, is still the same. Have we purchased or sold any significant assets? Let's say it's an LLC that does real estate and you buy properties. Did we buy or sell anything that year? Did we take on additional debt in there? You want to be recording this? This is kind of record keeping. It's like tracking what the heck's happened over the year. And then sometimes you'll put in, like, for those of you that have employees or something like that. You may want to note any. You know, if you have a small business with like some management team or you want note those people or promotions or I changed the officer or added so and so as a manager, or we changed the treasurer of the corporation to this person. You know, those are things you'll typically throw in the minutes. It's just kind of a record of what the heck's going on. And so don't worry about putting something in there that doesn't fit. These are your minutes. And the. Doesn't need to be signed by everybody. So let's say you've got partners in it. The manager can sign off on the minutes or the president of the corporation can just sign off on it. Sometimes the secretary just. Just a record of what happened in those meetings. Yeah.

Now, a few things to add to this. Hopefully many of you will be listening to this podcast while you're driving. Driving through the woods and over the hills to grandmother's house for Thanksgiving or Christmas.

Yeah, you know, I'm loving Christmas music. I was in the store. I can't remember where I was. I think I was at Whole Foods. And they're playing Run, Run, Rudolph. Oh, I love that song.

Oh, that's a good one.

Run, Run, Rudolph. Oh, that's a good one.

That's a good one. Now, the reason why I say this is many of you, this is a great time. Thanksgiving dinner. It's the afternoon. Everybody's kind of meandering around the house. Nothing's going on. Think of Clark Griswold maybe. And just an easy little afternoon around the house. Some people may be going shopping, but this is a good time to have Your board meeting. Now, if it's a llc, we call it a board of advisors. If it's a corporation, board of directors. It's an internal document. You don't have to file it with the state or the irs. And if you'd like to get some formal questions and have it typed up pretty and make sure your company is maintained properly, we have a company maintenance program. Just go to our website, KKOS lawyers. Talk to Becky Lloyd, anyone on the team, and say, sign me up. They'll give you some questions just like Matt rattled off. There's probably 15 other ones. And it just kind of gets your juices flowing. And you have your meeting and try to get everybody involved in the meeting with signatures and comments and thoughts. You don't have to, but make it a really powerful opportunity to take a tax write off, too. You're going to go there for Thanksgiving and your board meeting. You can zoom people in. You can call them on the conference line. Just good stuff. So it's, I think, lots of fun.

Yeah. Yeah. I'm ready for another one. Or would you want to go? I mean, I don't want you to go.

I was going to say something else about over the woods and through the hills or over the hills and through the woods. It was a good, you know, this is a great time of year. Lots of fun. Get, get the.

This is a good time of the year.

Yeah. Oh, I remember. I was going to say I've got a really good smooth jazz Christmas album for you. You're gonna love it. You'll feel like you're walking through the mall or the grocery store at Christmas. You can't wait. You're gonna love it.

Okay, here's. This is a reality check. You know, you're old. This is how I know I'm getting old.

Okay?

I am old. Okay? This is how you know when you go to the mall and the music they play is the music you actually like. That's how you know you're old. 80s and 90s stuff's going. I'm like, that's some great music.

Yeah, Yeah, I like it. Okay, that's good. That's good. Well, here is Mark Croft from Willis, Texas, and he says, I have an S corporation. S as in small, with no outside employees. And I want to purchase life insurance policies for my wife and I. Can this be a business expense? Oh, Mark, if we could only wish it so you could write a letter to Santa and say, can I get a write off? Could I have a bowl of porridge, please? You know.

Yeah, the problem is the IRS and congress gave you a lump of coal on that one.

Yeah, yeah, big lump of coal on this one. So no business expense for Boy. Corey says we're, we're hopping today. Lump of coal. Little Oliver Twist.

It's very festive, festive show today.

Hey, if we're impressing Corey, there's some listener out there that might be enjoying the innuendos.

There's at least two.

Yeah, at least two. Yeah. Cory and his mom, you know, call your mom. It's going to be a good one. Okay, so everybody, 99% of the time, you're never going to write off insurance premiums, period. The reason why primarily is when you get life insurance, it's tax free. So if you start trying to tax the premiums, you're going to jack up the recipient's tax free receipt of that money. And it's just not allowed in an S corporation or an LLC anyway. The owners cannot write off their life insurance premiums. Now I think life insurance. I know I'm going to tick some people off here, but I'm transparent and I'm totally honest about my feelings. So I'm going to say I'm a term and invest kind of guy using some whole life insurance in a very specific manner for irrevocable life insurance trusts in conjunction with a charitable trust or something. Good stuff. Now before I make anybody else mad, and I can see Matt's eyes of daggers saying, be careful what you say. I'm just going to say life insurance is not a write off. It can be a good fit for some people, not for others. Always get a second opinion and not from someone that's selling you insurance. Get a second opinion. So, yeah. Is that fair to say? Matt, are we okay? Are we on?

Yeah, I'm just not going to touch it. I'm just going to let it lie.

Let it lie.

All right, all right. This great question here from Brian in Wisconsin. He says, I'm considering purchasing a real estate brokerage in Wisconsin. Non franchised. What are the pros and cons of purchasing the business versus purchasing the business assets? Okay, this is a great question. So for any of you buying a small business, you have two ways you can do it. You can do what's called a stock purchase where you're buying, let's say the LLC ownership or the stock of the S corporation. And now you're just that. That corporation or LLC just stays. You're just the new owner of it. Now that's one way to do it. The other way to do it is you just buy the assets of the business. Let's. For the real estate brokerage, what are the assets of that? Okay, maybe it's the name, the customer list, the goodwill is what they'll call it, the assets, the furniture and stuff, if there's an actual physical office, all the, you know, inventory, if there's promotional items, whatever it may be. So the phone number, the website URL, like all that stuff, you're, you're buying as the assets of the business, but you're not buying the company. Now, as a general rule of thumb, a buyer of the business is best off buying the assets because I don't know what's happened in that corporation. Let's say I go buy someone's corporation or LLC that was a real estate brokerage maybe a year ago, they have some wrecked deal that happened and some possible lawsuit brewing that's going to pop out of nowhere. And now you own the company and you're going to have to deal with it. If you buy the business and do a stock purchase, that's what's going to happen. But if you just bought the assets, you're not buying the liabilities too. I'm just buying the assets out. I'm going to set up my own S Corporation or llc, depending on what your tax situation is. You got partners or not for the new real estate brokerage, you take their name and they're going to have to give you a release of the name so you can refile under a variation of that with the state and you just carry on with the business. Got the assets, you got the good and you didn't take the bad. Okay.

I love it. Now, this actually is ironic that we have a second question on purchasing a business. And this is. It's very common in Main Street America where people merge or, you know, go ahead and merge, you know, little Brian Regan throwback there. But some people will merge their small business with another. They'll buy someone else. Maybe their kids are going to buy their business. So this is really common. And your average lawyer or accountant that maybe you've been working with for years, they don't handle buy and sell transactions on a regular basis. So again, if they kind of look like deer in headlights or something, doesn't feel right. Get a second opinion. It's okay. You're talking about thousands and thousands of dollars and thousands of hours that you put into a business or you're going to if you're purchasing. So don't screw around trying to cut corners on the professional services in the transaction there could be. I mean, heck, I've got a whole two or three chapters on this in financial freedom, just on the transactions between transferring a business to someone else. I mean, it's a big deal. So it's ironic here that we have another question on this from John in Washington State, and he says, I was approached. He runs and operates an accounting firm. Little love you, man. I was approached by another firm and we will be going through a merger. Okay. We will operate under their entity. Sounds good. They have a single member, pllc, taxed as an S corp. My understanding. Sorry. Yeah. My understanding is that it would be advantageous for the company to be an LLC or PLLC partnership with our own S Corps owning their appropriate percentages. Yeah, John, you're right. I cannot emphasize how right you are. And the fact that this wasn't brought up in the first conversation of the merger scares the hell out of me. Who in the freak are you mergering with anyway? I want to do the deal, but I do not want to complicate things more than they will be. Are you kidding me, John? You go ahead and complicate the hell out of this. This is your business, and you're merging with someone that doesn't know what they're doing. Are you kidding me? Trust me, there's other accounting firms that would love to merge with you. Don't you got to make sure everybody out there. I got to say this. If there's a deal you're going into, whether it's real estate or an investment project or a business operation, and it doesn't feel good in your heart and your mind, stop, stop, drop and roll. Get out of there. Get a second opinion. Do not feel pushed. Do not feel pressured. You've got to wake up in the morning at peace with this. And if you're not at peace with it, you stop and talk about it. So, John, you're. And for everybody out there, if you're going to partner with someone, a partnership should, nine times out of 10, be an LLC. And if it's operational, each partner has their own S corporation. It's efficient for tax planning purposes, for professional purposes. In this situation, it just makes sense. And for an accounting firm not to know this, John, it's just red flags for me. So you go ahead and complicate this. This is your life. This is going to be your business. And if you're running the operation through their name and it's their entity and all that, you're already giving up control in some form or fashion. I don't know all the facts, but you better protect yourself, bud. So be careful. Boom. All right, Sorry. Got excited.

Yeah. Mark. Coming in hot there.

All right. Coming in hot. If you don't know what coming in hot means, you guys are. You know what coming in hot means. I know some of you may be thinking you're 18 years old at prom, but no, this is coming in hot means you're in a plane. Corey appreciated that joke. Thank you, Corey.

I love it.

He's like, what are you drinking today? I mean, it's like, I never get him laughing out loud at my jokes. This is. Maybe I'm on fire. That's it. They're new.

Yeah.

Coming in hot means. And this could be a Top Gun. Another Top Gun analogy, okay, is when you're in a plane and you're coming in to land, and you're coming in on a greater velocity or angle because you got to come in hot. You're, like, in a hurry. And so in the good old days, when Matt and I would ride in a plane together, which our employees said we could never do again because they didn't.

Mark. With Mark attempting to fly.

Flying the plane.

I don't know. Let's just say he was in the

cockpit and Matt was back, you know, squeezing into the seat, making indentions with his fingernails. Yeah, those were the good old days. But you're coming in hot means you're coming in fast and hard in a landing in a small plane. There you go.

I thought it was like, you know, like Ricky Bobby coming in for a pit stop. A little too fast, like, coming in hot.

That could be.

Could.

Could apply there, you know, show me second place. Show me loser. I'm with you. Yeah. Okay.

All right.

Okay.

Joe's got a great question here.

Okay.

Joe says, my friends think I'm weird and nerdy for listening to a tax and legal podcast like it's an entertaining mystery.

Get new friends. Get new friends.

Yeah.

Damn it.

He's always looking for ways to optimize and grow your business. Appreciate the excellent advice to do on the show. All right. He's got a great question, though. Good.

Hold it. What's his name? I want to find his Joe.

Yeah.

All right. Okay. Oh, there he is. Joe. Okay.

Yeah, so he says, I'm currently under contract to purchase a commercial building with a buddy who is partnering with me on it.

Wow. Another partnership. Yeah.

We need to decide how to structure our partnership entity. We both already have our own S Corps, and we plan to jointly own the new partnership entity with. Makes it A little more complicated because we're not. Not only are we purchasing the building, we're also going to start running three new businesses out of the building that will be equal partners in all the three businesses. One's a coffee shop, wine bar, one's a photography studio, and one's a co working office space.

Man love what he's doing.

Four separate llc, one holding company, all owned by the holding company or stability. A separate LLC isn't connected the businesses.

Joe, Joe, you need a consult with one of our senior attorneys asap.

Yeah, let me say this, Joe, where your last question is the right way to go, or should we or should the building be in a completely separate LLC that isn't connected to the businesses? So let's go over really important fundamental point on entity planning and structuring.

How do they get a whiteboard behind me? Corey, could I get a whiteboard behind me? I'm going to call it talking.

You start getting ready on the whiteboard for those of you on YouTube.

Okay.

All right. The first thing, Joe, is we want to separate the property, which is a passive investment asset, from the business and operations. So you think of these two things as separate. I know you and your partner are going to own them all the same. But you know what? Mark and I have operational businesses we own together and we have property we own together. Some of those operational businesses operate out of those properties that we own together and pay rent. Now, you're going to be doing the same thing, Joe. You're going to be really. It's going to be the exact same thing. So I would have an LLC that just you and your partner own. Your S Corps are not involved.

Okay, we're going to do Pictionary as if. So while Matt's describing this, for those on listening on Audible or a podcast, Matt, do your best to visually create this picture for people. I. For those that are on YouTube, and some of you may want to catch the show on YouTube, I'm going to diagram this on a handy dandy whiteboard here behind the camera. Okay, so Pictionary is on. Okay, so how you would do this?

Okay. Okay, we got a line down the middle separating left and right side. Of course, on the left side we've got operations. On the right side we've got assets. Now, the real estate is an asset. This commercial building you're buying, this is an asset represented by that triangle on top of a square.

Sounds like. Sounds like. Okay, this little stick figure is running or sitting. Okay, so we have a house. This is the commercial building.

Yeah.

Okay. And do we want the S Corps to own it?

Heck no. Don't. Don't mix in S corporations with properties unless you're a builder or something like that. Okay. You're holding this for. This is an asset. Remember, we want S corporations to help save us on self employment tax. That's one of the main reasons to use an S corp on an LLC that owns a rental property. Commercial rental. There's no self employment tax, rental income and capital gain income when you sell it. Those are exempt from that. So no reason to get the S corp involved there.

So LLC number one is on the right side taking title to the commercial property. And each partner's trust, revocable living trust, would be the owner of their share of the llc. So sorry, my microphone's in the way here. Let me move the mic.

Yeah. Okay. And if you don't have a trust, that's just you and you can add in the trust later. So. And the trust is just disregarded for taxes. There's nothing going on your tax returns. That's just a good estate planning mechanism. Okay. Now this commercial property is going to be leased to this operating business or these three different operating businesses.

So we have three LLCs over here on the operations side. So on the left side of the paper for those driving down the road, we've split the paper in half. On the right side is our rental commercial building and on the left we have three LLCs. One is. What are they? One's a.

One's the coffee shop, wine bar. Okay. One's the photography studio. The last one's a little unique. This is a co working office space. So in some ways you're kind of leasing out some of the building. I know it's a co working scenario, but that's still going to be possibly rental income over there.

Yeah. Subleasing different treatment something.

Yeah.

Okay. Now these three LLC, hypothetically this is option one, would each be owned 50, 50 by the 2s corps of each partner. So if I had. I'm going to create S corp for partner number one. I'll signify S in the middle of a circle. It would own 50% of LLC number one, 50% of LLC number two, and 50% of LLC number three. So each operational entity is owned 50, 50 by each partner's s corp. Yeah. Looking good.

All right, now that's one way to do it. Now, Joe asked about doing a holding company some way here. So we could do one holding company, LLC on the operations side that the 2s Corps own and that holding company LLC owns the three different businesses. Yeah, operational businesses.

I, I mean could.

They'll save you one tax return because here's the thing, those three different comp businesses that are owned by each of your S corps, those are all three different partnership tax returns. Now they are separate businesses. You're going to be keeping separate finances for it anyways. You should. You'll have separate bank accounts, but you're going to be doing a separate partnership return on each of those that flows to each of your s corps. 5050 the profit and loss. So this is option two where you just have one kind of holding company you guys use for everything you do together and it owns those separate businesses. The coffee, wine bar, the photography studio, the co working office stuff.

I like option two. I do. Yeah, I kind of didn't like it at first. But some of you may go, well you now you have five LLCs, one LLC on the right for the building, one LLC on the left that's owned by the 2S Corps and then three subsidiaries for the three operations. So some of you may go, well that's five fricking five LLCs. Just like you lawyers. You're trying to sell me. But no, no, we're trying to save you because instead of having three tax returns on the left, we distill it down to one. And so those are wholly owned subsidiaries with a consolidated tax return.

Now I like that. Can I do one kind of down and dirty way to do it? That might be okay.

Third option. Okay, flipping the page here.

Yeah. Okay, now let's say Joe's like, guys, that photography studio is going to bring in 50 grand a year max. Net that the, the coffee shop, 50 grand a year max. The co working thing, 25,000. It's not big dollars. We could just do the 2s Corps and your one holding company LLC, just one LLC owned by your 2s Corps and then do DBAs for those three different business names. So you're running three different types of things out of that one partnership entity. And if these businesses aren't significant revenue sources, that might be a good way to do it. It simplifies, it keeps you down to just each of you have your own S corp return. You got one partnership per turn.

Yeah. Now let me say why option three would be nice too. Because if you have three different LLCs, subsidiaries or standalone for the three different operations, remember people, they're doing their own payroll, they're doing their own set of books, they're doing their own sales tax returns. They. If you want the asset protection of three different entities. You can't have just one payroll and do everybody under the same payroll or combine everybody into one frickin set of books. If you want that, go with option 3 here in the diagram. 1 LLC, 3 DBAs. And you know what, if things take off, you can always spin off an LLC down the road.

Absolutely. And maybe it's like, you know what the coffee bar wine shop has got, that's a million revenue a year. Let's spin that off in its own single member LLC at that point. And maybe you just kind of see how it goes with these three businesses all into one partnership entity.

I like it. And let's say someone comes along and goes, hey, I love what you're doing with the coffee shop and wine bar. We need to do a makeover. I'll throw in a couple hundred grand and you bring in a partner. So then when you do that, you'd spin off an llc, create a partner over here, and that partner might be in for 20, 30, 40%. And then the Main Holding LLC maintains their ownership percentage. So now you could expand one of those three operations with a partnership scenario down the road too. Well, there you go.

All right. There you go, Joe. It all depends on, I think, how big of the businesses each of these is going to be. And because there's obviously costs and a little more administrative complexity and from option one to three.

All right, well, we called an audible. Corey here in the studio came through. We switched to a whiteboard quite quickly. Cory, I'm impressed. Thank you, sir. All right, we're back to regular camera. Good question, Joe. That was a fun one. All right, Kristen from California, I should read these questions in advance to make sure they're not hard. I don't want to answer hard questions, but I'm just going to read it. Oh, no. Okay. Christian from California, I had a C Corp and terminated in 2019 with debt from the landlord. Okay, so it sounds like she owed the landlord. She shut down her business and the landlord's pissed about wanting back rent in 2021. We signed the settlement with the landlord. I knew it. I saw it coming. So the landlord's suing her. She's like, all right, we'll sign a deal in 2021. And she started to repay the debt monthly. How can we deduct this debt repayment for tax purposes? I would think this is a capital loss because it is from C Corp or any way to offset ordinary income. Well, I'm going to. This is a tricky one. If the C Corp is dissolved and Gone. There's. You're not going to deduct it in the C Corp. Think about it, everybody. The business is dead. It's over. She said terminated. So I suspect the C Corp filed a final return in 2019. Then Lo and behold, the landlord comes knocking and saying, I want my freaking back rent. Because guess what? Kristen probably did. She signed a personal guarantee on the loan, which is normal. Matt and I have had to do that over the. Oh, sorry, sorry. We've got a. My dog here in the studio is needing something thrown at her. We're good. Okay, now we're good. That's Winnie. She's been on the show when we did our pet show. I did not expect to bark there. She's very. Matt, has that ever happened?

Yeah, she's. She's typically well behaved.

Yeah, I don't know what happened, Corey. Winnie just barked here on the show. We might have to cut that out of one of these things, but. Okay, now here's the thing. Matt and I over the years have co signed or personally guaranteed a commercial lease. But. So what happened with Kristen is the C Corp's gone, the business is gone, and then the landlord shows up and says, I want my money. So Kristin now as an employee and shareholder, is having to pay this loan. Well, this settlement back, which is really part of rent. This is going to be a deduction on your 1040 tax return if you're lucky. I. If you were continuing to operate the business somewhere else and this was a continuation of that business, like say you said, well, we moved across town and I started something similar and this is kind of cleanup, then I would probably just write this rent expense off for prior rent in the new business. And I think you'd be. That'd be the easiest place to go with this. But if Kristen, you've moved on to bigger and greater things and you've never re engaged into a operational business similar to this one, this might be a personal loss that may not be deductible anywhere under the schedule A itemized deductions. There used to be a section for losses like this where it might have fit, but you might be able to call it a capital loss on the schedule D. I would talk to your accountant and really, really nail down and get a second opinion as well. But sorry for the pauses here. That is a tricky one. So. Yeah, yeah, it's trick.

Yeah, that's a tough one. That's why I skipped it. You know, Mark just waded right into it.

Yeah, I know. I said. Ironically, I said that I Kind of saw it coming. But Christian, great question. And the sad part is everybody out there may say, well, moral of the story, never co sign on a lease. Well, good luck. I bet you Donald Trump had yeah, sometimes you got to Donald Trump on his first deal in, you know, Manhattan probably had to personally guarantee that building deal Gordon Gekko in Wall street probably had on that little deal when he's driving by that first building he ever bought, probably had to personally guarantee it. So don't be afraid of that. Just. Yeah, there's a lot of things to talk about in that get out of

it if you can. But yeah, many of us small business owners are, you know, have I've had to personally guarantee leases for us in different businesses and I don't love it. But sometimes to get the space and the terms and deal you want, it's just a necessity. So. Okay, I had, I had a question come up on social media about failure to register your business foreign. So we had failure to register where business foreign. So let's say you set up your entity in Wyoming, but you're really doing business in Arizona. And you didn't register it in Arizona, but you're doing business here. What is the repercussions for failure to register for this was what's called foreign. When you're really have your entity set up in one state but you technically do business in another or maybe you started in one state and now you're doing business in multiple states. And this could be a rental property. You buy rental in a new state and use the same LLC you have in the first state. So once you start doing business in a new state which for a rental property is going to be you own a rental for an operating businesses, you've got employees or a physical location there where you're operating from, you need to register into that state. And failure to do that in some instances can result in having no ability to have the corporate veil or the limited liability protection of the llc. So something happens in that business, they're going to be like, well this is a Wyoming company. You're doing business in Arizona, you never registered here. And so you got to be careful on that. That's most states will not apply that. But that is a worry. What I have found from a lot of states and I have an article on this, if you go to SDRA handbook or matt sorensen.com A lot of states actually assess a penalty for failure to register foreign that can add up pretty significantly. So if they catch you operating there and you haven't, you haven't registered, there can be some significant penalties. Can be in the thousands and tens of thousands of dollars. So just know when you start operating in a new state, buy new property, new state, you're using the same entity. You need to register that same entity in what's called a foreign registration. We handle those, of course, in our law firm. It's the same entity. You're just registering it to do business in the next state.

Okay, I've got two last questions that I really like, and I think this is helpful for a lot of our followers that are Main street business owners trying to generate income in variety of ways. This is from Marie in Massachusetts. Says, I love the show. I listen to it religiously. Thank you, Marie. I don't know. Does that mean she listens on Sundays only religiously, Just kind of. Just every week, no matter what?

Yeah. Yeah. Okay.

Well, Marie, thank you.

Church is in session. You know, on the Main street business podcast, seven days a week. That's right.

We're in session. Okay. She said in a recent podcast, you mentioned a potential stream of income via affiliated links. Okay. Then she asked a question. Let me first define what being an affiliate marketer is. You can go to a variety of major box store websites, for example, Amazon or Walmart or Target, and at the very bottom of their site, you can. There's a button, a little option that says in their menu, become an affiliate. And when you click on that, you put in your social, your address, your name, your address. You know, I say address. Anyway, you put in all your info. And now when you take links of products on Amazon or Walmart and put them out on your own website or your social media and go, hey, I just bought this product. I freaking loved it. And someone says, ooh, I'll go buy it. And they click on the link that you generated as an affiliate, you get a piece of the action. It might be 2%, it could be 10%. It could be. Some private companies do 50%. I know Matt and I, we have affiliate links for some of our products in education. So you can go to markjkohler.com and sign up as an affiliate and then tell people how great some of my info is and make some money. When someone buys something that's being an affiliate, and most major companies have affiliate links because they want their customers to be their biggest salesman. Well, very, very common. She says, I am trying to determine if a business that is based on posting affiliated links to earn commissions income would be considered SSTB for purposes of the QBI deduction. SSTB is that small. I'm trying to. I got a ssd. I feel bad. She's like, you guys should know that I should have probably. That is a trade or business involving the performance of service.

Buying you time with my foreign registration example to get a new question.

Yeah, I know, I know. Hey, I just like going raw and uncut here. So okay, so an SSTB is a service based business. Got it. For the purposes of the QBI deduction, which is the 199A deduction Matt talked about earlier, basically what Marie is saying, if I'm just an affiliate marketer, is this a regular business like cleaning windows or janitorial or electrician or accounting or law? Yes, being an affiliate marketer is a service business and it is subject to self employment tax. You would want to run it through an S corporation. She says, I have an S corp and I'm the only employee and I scour the Internet to find hard to find deals and products and then I post them on my social media and my website and the income I make is based on the commissions. And again she asks, is this an sstb? Yes. It sounds like a disease. This is a std. I would go see your doctor right away and try to get some, some

sort of prescription, specified service, trade or business.

Yeah, there you go. So people, you do not want an std, but you do want an SSTB because you're making money while you sleep. This is great. I'm not going to touch this one any further. There's a point in an analogy where you're like, I'm going to let that one just, you know, just simmer. I'm going to. Cory's trying to, he's trying to jab me to go further and then that's when we end up getting an E rating jerk. Okay, all right, so stick with sstb. It's a service based business. And I want to recommend all of you out there, if you have a social media following, if you have a website, if you have a product or service that you can affiliate link other cool products that go with it off Amazon or Walmart or Target or anywhere. Do it money while you sleep baby, and run it through your S corp. It's ordinary income and you get the qbi. Boom, bada bang.

Yeah. And the sstb. Just keep in mind there are these businesses that are limited on how much they can take on 199A if they're like an attorney, a doctor. Okay? And so these SSTB's that are professional services.

You said the SSTD.

All right? These are, like, ones that can be limited. But. But

he said.

Oh, man.

Okay. What's that from? Come on.

That's Beavis and Butthead.

Yeah. Thank you. Thank you. I appreciate that you got the reference.

I was never a big deal. Some Butthead fan, but I do know the jokes.

Yeah, there you go. I'm not a fan either. Okay?

Okay, so just. I just want to make sure. I didn't realize SSTB can be. This is what it is. The ones that are higher, that are. If you're high income in those, you can have the 199. A reduced. All right? So just be careful about that. But again, unless you're making a few hundred grand a year, don't even worry about it. You're not the 199. A reduction on that doesn't even apply.

I've got to say, Matt is a trooper today. I'm dying over here laughing. And I can't. I can't. I can't move him off his pedestal.

It's gonna be like a dad. It's. I'm gonna. If I start getting into it, we're gonna be swirling at the bottom of the toilet bowl really soon, so somebody's.

All right, okay, here's my concluding question, and this is a good one. All right? No more dumb jokes. I'm blaming Corey for today's show. Okay? All right, this is Jake from Newport. Right. Rhode Island. I'm taking all the. I'm taking all the east coast questions, by the way. I want to tell you. I'm. Yeah, I'm just loving my east coast folks today. Okay? Newport, Rhode Island. Jake says my S. Corporation has outgrown the desk in my bedroom. That's a big hurdle in a lot of small businesses.

Congrats, congrats.

Proud of you. Been there, done that. I'm not kidding. Everybody starts out with a desk in their bedroom. Seriously. You know, I bet you Steve Jobs, when he was, you know, they were. They were working their little computer thing, garage thing, they had to do the book somewhere. Bet you it was a desk in his bedroom. All right, so, Jake, you don't. You. You own it. We're proud of you. Take yourself out, treat yourself. Get something real nice. Okay. I'd like to build an addition to my home to make a formal home office. Whoa, whoa, whoa. Okay. We went from desk out of the bedroom to. Now I'm building a wing onto my house. Okay, Jake, slow down, tiger. Okay, we'll assume that your business is killing it. And that's justifiable. So. But be careful, folks. Don't want to grow too fast. All right? He says, can the S Corp pay for and deduct the construction cost? New I will tell you how to do it here in a moment. And he says, how would this change the home office deduction I've been taking? In my mind, it would be the same as renting space and making capital improvements. Your thoughts, by the way, Love the show. Thank you, Jake. Okay, people, remember Jake is working out of his home as an employee for his S corporation. The S Corp doesn't own the home. The S Corp doesn't live there. It just happens to have an employee that lives in a home. You have to put this in perspective. So if Jake wants to go build an addition to his home for a home office where he can get reimbursed for a reasonable rent or reasonable home office deduction for the use of that space, the answer is, Jake, the S Corp is going to give you a tax free reimbursement for the use of your home office space and go through a reimbursement strategy. Having the S Corp pay for the improvements would not be good outside of the realm. And this is the best tax way to do it. The simplest and you're going to get the same write off generally, you just got to go through a different way of getting there.

Yeah. So bad news, right? So Jake's like, oh, I'm going to add this wing on my house and my S Corp is going to pay for it. Going to expense and write off the whole thing. No, you know, sorry, Jake, unfortunately you're not able to do that. But you're going to have some rent you're going to be able to reimburse and effectively expense. But all this addition, you're not going to be able to write it off.

Yeah. And Jake, this is a low audit risk issue. When you run rent reimbursement through an S Corp for a, you're going to do some calculations with your accountant to find out how much you spent on this addition. It's going to be primarily used. Well, exclusively. Exclusively used and dedicated to your business operation, your primary business location. So you're going to meet those tests. Then the S Corp can take this as a rent deduction, which is very low risk from an audit perspective. And it can be tax free to you as long as you don't inflate it and you don't get too aggressive. So work with your accountant on a really nice reimbursement. I Think you're gonna find you'll get this in the end? You're gonna get a better result with a lower chance of audit.

Cool.

Can I say it one more time? Boom. Bada bang.

All right.

Okay. You can live with that?

Yeah. Yeah. That's like saying. I like how you say that after your own statement, you know? Well, you know, it's kind of like saying, that's what she said after you say something.

Well, I thought it was better than that. That's kind of like a pen drop. Boom. You know, it's like. It's with authority. Okay, do you have a final question, or do you just want to give anybody. Give them the secret to life? Just like a little tip here before we go up.

The secret to life. Okay, I'm going to give my tip. Okay. This is deep. And I'm serious on this.

Hold it. Let me get my yellow pad. I'm gonna write this down. Okay, go ahead.

Okay. I did a social post on this, like, three years ago. I thought it was pretty profound.

I'm glad you're recycling it now.

I was like, boom, Bought a bank. Okay.

So profound. We held back for three years. But I'm glad you brought it out now. All right.

Okay, okay, okay. Sorry. Yeah. Posted a GQ photo of myself, and I said this.

Okay.

Think I'm serious. This is serious.

Okay, okay, okay. It's the little things. It's the little things.

Okay? Think of the person you want to be and then do everything in the day that that person would do. Okay? So think of, like, who the heck you want to be. What time do you wake up in the morning? Seriously, like, what clothes do you wear? Do you have any sense of style? How much time are you spending with your kids or family in the morning? Are you working out? Are you. What time are you getting started in your workday? How are you using your time at work? Are you doing the things that that person that you have in your mind is the person you want to be every day? Think of what that person does, and if you don't follow through on all those things that that person would do, you don't want to be that person. You don't really.

So really, you really don't mean it.

You really don't mean it. So be serious and intentional about the person you want to be, whether it's time, with people achieving your goals, the lifestyle you want, whatever it is.

Sounds like too much pressure.

Person would do in your mind that.

Yeah, too much pressure. I'm just gonna keep rambling through.

I'M just saying, if you want to be like James Bond. Well, what does James Bond do? He's in shape.

Okay.

He wears nice clothes.

I'm glad you went with James Bond in this. Okay.

He has a certain set of skills, you know. Just saying. Yeah. You don't just. You don't just get to be like, I want to be James Bond and you're James Bond.

Yeah. I don't know if I could be James. I could be Liam Neeson and taken. You know, you could because, you know, I got a set of skills and I can listen to your voice on a tape recorder like 80 times and then pick you out of a room in another country. Just literally. Yeah, that. That would be a sweet set of skills.

That's more achievable.

Okay, I'm going to repeat it. Think of the person you want to be and do everything in the day to be like that person.

Yeah. Then do everything in the day that that person would do.

That person would do. Okay. I might do a social post on that. Thank you, Mr. Sorensen, and thank you, everyone for being here today on our Open forum where we try to answer questions that will change your life. Have a little fun. Keep it real. We are nerds. We want you to be a nerd. Nerds rule the world and they save taxes, build wealth and protect it. And that's okay. Own it. Know who you want to be. And you want to be a nerd, A financial nerd. You're going to be successful. Doesn't mean you can't be good looking. Doesn't mean you can't, you know, work a room. But deep down, you know your numbers, you know your business, you know your investments. We appreciate all of you.

Thanks, everyone. Happy Thanksgiving. If you're catching this before, we know, well, you're probably not catching this. I hope you had a happy Thanksgiving by the time this goes. It's Wednesday today, so. And remember, get the mainstreetbusiness.com if you're like, guys, why don't you guys ever talk about this on the Open forum? That's because you didn't go and submit a question. Go put that question in and we will cover it on the show. And if it's a, if it's a really hard one, just start out with a compliment and Mark will read it off on the show and we'll get right to it.

Okay, See you next week. Sa.